Europe Takes Off – The Trump Effect
Article from Beat Wittmann, Chief Investment Strategist @ Key Family Partners
Europe Takes Off – The Trump Effect
Two months down a four year presidential term – a lot more Trump to come! This means hope and despair depending on whom you ask. In any event, however, expect more intended and unintended consequences.
An unintended consequence includes Trump on direct course towards a self-inflicted US recession including troubles for US equities and corporate debt and a weakening of the USD against EUR.
War and Retribution – The Inevitable Backlash
Trump and his cronies are relentless in their political and economic wars on several fronts simultaneously. It is just a matter of time until reality will catch up with pipe dreams such as MAGA, winning trade wars, conquering neighbors or lasting peace with Russia.
Trump wages wars domestically against key state institutions and all non-MAGA parts of society, against neighbors such as Canada and Mexico as well as strategic rival China and the much despised EU. Particularly harmful are his absurd tariff and trade wars ignoring the undisputed economic fact to produce lose-lose outcomes regarding economic growth and corporate earnings.
Clearly, Trump is overreaching. He will, however, only ‘blink’ when US capital markets go into volatility spikes, liquidity crunches and sharp falls. Meanwhile, political disruption, erratic economic decisions and deliberate unpredictability are poisonous for investors, business and consumer confidence.
Epochal Shifts in Geopolitics and Markets
Equity markets are reliable economic indicators and European equity markets trumped their US counterpart ever since his election victory. Furthermore, Europe’s performance leader, the defense-industrial sector, has strongly outperformed the US tech sector. It was a wake up call for many investors who confidently expected that US markets would lead again in 2025.
And there is more bad news for US markets as Trump’s economic policies are highly inconsistent and damaging. The obsessive focus on tariffs will trigger reciprocal retaliation from China and Europe, thus, making US businesses and consumers poorer.
We believe most investors got caught off-guard because of two main reasons – the herd-driven extrapolation of US exceptionalism turbo-charged by Trump’s MAGA promises and the absence of understanding the political dynamics in Europe and, particularly, Trump’s escalation towards Germany triggering an unprecedented response.
A painful break amongst Western alliance partners was delivered by US Vice President JD Vance speaking at the recent Munich Security Conference, lecturing and insulting the German hosts and European partners. More so, JD Vance took the time to meet with and endorse the far-right radical Alice Weidel, chief of the ‘Alternative für Deutschland’ (AfD) party, the ultra-nationalist, anti-EU, anti-NATO and pro-Russia party instead of meeting with the German Chancellor.
Europe and Germany Striving for Strategic Autonomy
The winner of the German elections, the designated Chancellor Friedrich Merz, has forcefully communicated that a strong and independent Europe is his number one priority, including the ultimate goal to rearm against Russia and secure freedom and peace in Europe. With Germany’s parliament having just approved a EUR 1 trillion spending plan for defense and infrastructure, a new era of political determination has begun.
It is in the EU’s DNA to react with political cohesion and determination to exogenous shocks and existential threats. In addition, expect Ukraine with its vast resources to be eventually integrated into Europe politically, economically and in terms of security, opening up vast economic and investment opportunities. Remember the end of the Cold War in 1989 and the German reunification triggering unprecedented development of Eastern Europe towards freedom and prosperity.
European Equity Markets Favored
Europe’s paralysis and biggest challenges can be resolved by the political will to free up available resources. Clearly, Europe is in dire need of structural reforms, investments in defense and critical infrastructure, deregulation and a better business environment.
A major step towards its potential is investment facilitated by fiscal expansion and banking and capital market union. The ECB’s recent approval of Unicredit’s stake in Commerzbank is a clear signal towards pan-European banking consolidation.
We clearly favor European equity markets and their risk-reward profile as we are convinced that long-lagging Germany and Europe are at the cusp of structural reforms, supported by low inflation, interest rates, attractive valuations and corporate earnings benefiting from improved economic growth.
European Military-Industrials Continue to Outperform
In Europe we strongly favor the European military-industrial complex as defense spending will massively increase in direct response to the Russian military threat and the US retreat from Europe.
It is an undisputed economic fact that defense spending yields positive effects in growth, employment, productivity and innovation. In this context, expect Europe’s strong and sophisticated industrial base to continue to benefit and outperform.
